FINANCIAL ACCOUNTING AND REPORTING Page 1 of 5

COVID 19 PROJECT FOR ACCOUNTANTS

INVESTMENT IN DEBT INSTRUMENTS

PART I. DEBT INSTRUMENTS CLASSIFICATIONS

A. Amortized Cost

a) The entity’s business model to collect its contractual cash

Requisites for flows, and
Classification b) The asset’s contractual cash flows represent ‘solely payments
of principal and interest’
Profit or Loss a) Effective interest income
Implications b) Impairments losses and reversal gains
c) Gain or loss on derecognition
Statement of a) Measured at amortized cost
Financial b) Classified as a non-current asset unless maturity is within 12
Position months after the end of the reporting period

B. Financial Assets at Fair Value Through Other Comprehensive Income

Requisites for a) The entity’s business model is achieved both by collecting

Classification contractual cash flows and selling financial assets, and
b) The asset’s contractual cash flows represent SPPI.
a) Effective interest (income)
Profit or Loss b) Impairments losses and reversal gains
Implications c) Gain or loss on derecognition including reclassification
adjustments (PAS 1)
a) Changes in fair value due to subsequent measurement. The
OCI cumulative OCI is in Equity, while changes in OCI account is
part of comprehensive income
a) Measured at fair value after amortization for the effective
Statement of interest
Financial b) Cumulative gain or loss on fair value in SHE
Position c) Since PFRS 5 excludes the scope for financial assets, FVOCI
are non current asset unless maturity is within 12 months after
the end of the reporting period

C. Financial Assets at Fair Value Through Profit Or Loss

a) This is a “residual category”. If none of the two previously

mentioned business models apply or if any of the two business
Requisites for model apply but the contractual cash flows are NOT SPPI.
Classification b) If both requisites for the AC and FVOCI category are met but
the entity optionally elects to measure debt instruments at
FVPL to eliminate an “accounting mismatch”.
Profit or Loss a) Nominal interest (income)
Implications b) Direct transaction cost incurred on acquisition
c) Gain or loss on changes in fair value on subsequent
measurement
d) Gain or loss on derecognition
Statement of a) Measured at fair value
Financial b) Since the financial asset is held for trading, FVPL shall be
Position classified as a current asset (PAS 1)

9/11/20 HO#14
FINANCIAL ACCOUNTING AND REPORTING Page 2 of 5

PART II. RECLASSIFICATIONS

a) Under PFRS 9, reclassification of financial assets is required if, and only if, the
objective of the entity’s business model for manages those financial assets
changes.
b) If the entity determines that its business model has changed in a way that is
significant to its operations, then it reclassifies all affected assets prospectively
from the first day of the next reporting period (the reclassification date). Prior
periods are not restated.
c) The following procedures shall apply:

Original New
Category Category Accounting Treatment
Fair value is measured at reclassification
Amortized cost FVPL date. Difference from carrying amount
should be recognized in profit or loss.
Amortized Fair value at the reclassification date
FVPL
Cost becomes its new gross carrying amount
Fair value is measured at reclassification
date. Difference from amortized cost
Amortized cost FVOCI should be recognized in OCI. Effective
interest rate is not adjusted as a result
of the reclassification.
Fair value at the reclassification date
becomes its new amortized cost carrying
Amortized
FVOCI amount. Cumulative gain or loss in OCI
Cost
is adjusted against the fair value of the
financial asset at reclassification date.
Fair value at reclassification date
FVPL FVOCI
becomes its new carrying amount.
Fair value at reclassification date
becomes carrying amount. Cumulative
FVOCI FVPL
gain or loss on OCI is reclassified to
profit or loss at reclassification date

MULTIPLE CHOICE

LONG PROBLEM:

On January 1, 2019, Hershey Company purchased bonds with face value of P5,000,000 at
a cost of P4,500,000 plus transaction cost of P139,400. The stated interest rate is 10%
and payable annually every December 31. The bonds mature in 5 years or on January 1,
2024. The bond’s effective yield including the transaction cost is 12%. The fair value of
the bonds on December 31, 2019 is P5,200,000 while the fair value of the bonds on
December 31, 2020 is P5,393,500 with an effective yield of 7%. Lastly the bonds had a
fair value of P5,500,000 on December 31, 2021.
A. Assume the bonds are held for the purpose of trading and to realized changes in
fair value.
1. What is the 2019 interest income?
a. 556,728
b. 500,000
c. 600,000
d. 563,535

9/11/20 HO#14
FINANCIAL ACCOUNTING AND REPORTING Page 3 of 5

2. What is the unrealized gain to be recognized in the 2019 income statement?

a. 700,000
b. 560,600
c. 500,000
d. 200,000

3. What is the unrealized gain to be recognized in the 2020 income statement?

a. 393,500
b. 200,000
c. 193,500
d. 893,500

B. Assume the bonds are held to collect contractual cash flows and the cash flows
are solely payments of principal and interest.

1. What is the 2019 interest income?

a. 556,728
b. 600,000
c. 500,000
d. 589,478

2. What is the December 31, 2019 carrying amount?

a. 4,639,400
b. 5,200,000
c. 5,000,000
d. 4,696,128

3. What is the 2020 interest income?

a. 563,535
b. 571,160
c. 579,699
d. 556,728

4. What is the December 31, 2020 carrying amount?

a. 5,000,000
b. 5,193,500
c. 4,759,663
d. 4,830,823

C. Assume the business model for bonds is both to collect contractual cash flows
and to sell financial assets while the cash flows are solely payments of principal
and interest.

1. What is the 2019 interest income?

a. 600,000
b. 500,000
c. 556,728
d. 563,535

2. What amount of unrealized gain in other comprehensive income shall be recognized

in shareholders’ equity in 2019?
a. 503,872
b. 560,600
c. 200,000
d. 639,400

9/11/20 HO#14
FINANCIAL ACCOUNTING AND REPORTING Page 4 of 5

3. What is the cumulative unrealized gain in shareholders’ equity at the end of 2020?
a. 893,500
b. 633,837
c. 129,965
d. 500,000

4. What is the unrealized gain to be recognized in the statement of comprehensive

income for the year ended December 31, 2020?
a. 633,837
b. 500,000
c. 129,965
d. 193,500

D. If the bonds are reclassified from FVPL to FVOCI due to a change in business
model in 2020
1. What is the 2021 interest income?
a. 377,545
b. 368,973
c. 500,000
d. 359,801

2. What is the unrealized gain to be recognized in other comprehensive income in

2021?
a. 106,500
b. 228,955
c. 393,500
d. 200,000

E. If the bonds are reclassified from FVPL to Amortized Cost due to a change in
business model in 2020
1. What is the 2022 interest income?
a. 377,545
b. 368,973
c. 500,000
d. 359,801

2. What is the carrying amount on December 31, 2021?

a. 5,000,000
b. 4,830,823
c. 5,271,045
d. 4,910,522

F. If the bonds are reclassified from FVOCI to FVPL due to a change in business
model in 2020
1. What is the gain to be recognized in profit or loss as a result of the reclassification?
a. 129,065
b. 633,837
c. 503,872
d. 0

2. What is the unrealized gain to be recognized in profit or loss for the year ended
December 31, 2021?
a. 106,500
b. 500,000
c. 139,400
d. 129,065

9/11/20 HO#14
FINANCIAL ACCOUNTING AND REPORTING Page 5 of 5

G. If the bonds are reclassified from FVOCI to Amortized Cost due to a change in
business model in 2020

1. What is the 2021 interest income?

a. 563,535
b. 571,160
c. 579,699
d. 556,728

2. What is the carrying amount on December 31, 2021?

a. 5,000,000
b. 5,193,500
c. 4,759,663
d. 4,830,823

H. If the bonds are reclassified from Amortized Cost to FVPL due to a change in
business model in 2020

1. What is the gain to be recognized in profit or loss as a result of the reclassification?

a. 129,065
b. 633,837
c. 503,872
d. 0

2. What is the unrealized gain to be recognized in profit or loss for the year ended
December 31, 2021?
a. 106,500
b. 500,000
c. 139,400
d. 129,065

I. If the bonds are reclassified from Amortized Cost to FVOCI due to a change in
business model in 2020

1. What is the 2021 interest income?

a. 571,660
b. 377,545
c. 579,699
d. 500,000

2. What is the cumulative unrealized gain in OCI for the year ended December 31,
2021?
a. 669,177
b. 633,837
c. 35,340
d. 589,478

-E N D-

9/11/20 HO#14